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DS News December 2020

DSNews delivers stories, ideas, links, companies, people, events, and videos impacting the mortgage default servicing industry.

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Page 76 of 100

75 75 INVESTMENT GOVERNMENT PROPERTY PRESERVATION INDUSTRY UPDATES Journal Follow Us At: @DSNewsDaily REVISITING REGULATIONS FOR NONBANKS Federal Reserve Gov. Michelle Bowman suggested revisiting the regulatory framework that defines how nonbank mortgage lenders operate. Speaking via webcast to the 2020 Financial Stability Conference hosted by the Federal Reserve Bank of Cleveland and the Office of Financial Research, Bowman noted that the U.S. economy and financial services system came into the COVID-19 pandemic in a strong position. However, strains soon emerged regarding the residential mortgage market. While the Federal Reserve sought to address the situation through its massive purchasing of agency-guaranteed mortgage- backed securities, Bowman observed that the "crisis period has also revealed a number of new—or, in some cases, renewed— vulnerabilities related to lending and loan servicing by nonbank mortgage companies." Bowman pointed out that although nonbank lenders originate roughly half of all mortgages, including more than 70% of loans securitized through Ginnie Mae and the government-sponsored enterprises, they are vulnerable when it comes to accessing liquidity. Unlike banks, the nonbank lenders cannot tap into the Federal Home Loan Banks or the Federal Reserve System for assistance, nor can they use deposits as a funding source. Instead, she noted, they rely on warehouse lines of credit that are usually offered by banks. "During the last financial crisis, when the private-label mortgage securitization market started to freeze, mortgage lenders could not transition their originations from the warehouse lines to securitization," she said. Warehouse lenders became concerned about their exposures to the nonbank companies and cut off their access to credit. As a result of this funding crunch and other factors, many lenders failed, including household names like New Century Financial Corporation." While Bowman did not foresee the aftermath of the 2008 crash repeating itself, she expressed concern about liquidity- tightening through mortgage servicing, which many nonbank lenders handle in-house. "If borrowers do not make their mortgage payments, mortgage servicers are required to advance payments on the borrowers' behalf to investors, tax authorities, and insurers," she said. "Although servicers are ultimately repaid most of these advances, they need to finance them in the interim. e servicers' exposure is greatest for loans securitized through Ginnie Mae, as they require servicers to advance payments for a longer period than the GSEs. In some cases, servicers may also have to bear large credit losses or pay high costs out of pocket. "Because mortgage companies are now the major servicers for Ginnie Mae, this liquidity risk—and possibly solvency risk—is a significant vulnerability for these firms if borrowers stop making their payments," she added. e collapse of these servicers could create a domino effect, Bowman continued, impacting the lower-income areas and Black and Hispanic borrowers that rely heavily on these companies for their mortgages. She forecasted the worst-case scenario where "if some large mortgage companies fail and other firms do not step in to take their place, we could see adverse effects on credit availability." Although Bowman admitted the liquidity concerns that regulators had regarding oversight of nonbanks were raised before the pandemic, the severity of the crisis and the different situations that nonbanks face compared to their banking counterparts are giving the issue additional attention. "I would also note one lesson we learned in March, which is that conditions in financial markets can deteriorate very rapidly and unexpectedly," she said. "I'm paying close attention to the issues highlighted in my remarks today and keeping an open mind. But I think it's clear that doing the hard thinking and planning now—at a time when conditions afford us the time do so—is a very worthwhile investment. Our financial system and our mortgage market will be more resilient when they welcome and appropriately manage the risks associated with both bank and nonbank mortgage firms."

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